Broadridge Financial Solutions, Inc. (BR) Earnings Call Transcript & Summary

All right. We'll go ahead and get started. Good afternoon. Thanks, everybody, for joining us. I'm Patrick O'Shaughnessy, Capital Markets Technology Analyst here at Raymond James. And next up, we have Broadridge. And on their behalf we have CEO, Tim Gokey. Tim, welcome.

Patrick, thank you. Great to be here.

So for those in the room who may be a little bit less familiar with Broadridge, can you maybe just spend a minute or 2 provide an overview of the company, please?

Yes, I just have about 45 minutes of prepared remarks here. So we are a technology company with a -- I think, a really unique growth franchise that isn't typical. Our whole reason for being is to provide mutualization of critical functions, functions that need to be right but that are less differentiated in financial services, largely for capital markets firms, wealth managers, to a lesser extent, asset managers. We power a lot of the critical infrastructure, the need investing in trading, corporate governance and customer communications. We're about $17 billion in market cap, $4 billion in fee revenues, about $60 billion in directly addressable market with the products we have. So we think we have a lot of growth runway. And we translate that to really 3 growth strategies that play out through 2 financial segments. So the -- our biggest financial segment and strategy is on corporate governance. You'll see that in our financial statements as our ICS business. That's about a $2.5 billion business. It has sort of nice upper single-digit organic growth rates. And it's a really unique business. It is through that business, we connect every broker dealer to every public company to every fund complex and every institutional and retail investor. And we end up with nearly every position of every investor in the U.S. in our database, and that's our clients' data, but it gives us a unique relationship with our clients to help them do the next thing. And through that, we very successfully expanded that over time. And so very neat business for us. Second, the other financial segment is our Global Technology and Operations segment. That's about $1.5 billion segment. That has been growing at about 13%, 14% in the last 5 years. Within that, we have capital markets. About $1 billion of that is capital markets. We have a really leading position in the core infrastructure and capital markets. About 2/3 of fixed income in North America is on our technology platform. You'll hear us talk about we clearly settled $9 trillion a day, so pretty core part of the infrastructure in Wall Street, and we've been able to complement that in the past couple of years with the acquisition of Itiviti, now renamed Broadridge Trading and Connectivity Solutions, BTCS, which we think is a nice growth addition and really complements our capital markets franchise. The other part of the GTO business is our wealth management business. It's about a $500 million business. And I'm sure we'll talk about the investments we're making there and why we think that is a nice growth runway for us. The other piece I'd like to just make sure that everyone is aware of is really the long-term view that we take of our business. We are a pretty seasonal company, so we really don't manage through the quarter. So we'll give you a quarterly results, but we'll tell you really about how it affects the year, which is what you should care about. And then within that, we really give 3-year objectives. And every 3 years, we give them the objectives. And those objectives are really around a long-term model for creating shareholder value, which is -- and has been for a while, 5% to 7% organic growth with tuck-in M&A of a couple of points, 7% to 9% recurring revenue growth with operating leverage, 8% to 12% adjusted earnings growth with nice dividend, which has typically been about 2% and a little bit of share buyback, delivering low teens total return to shareholders over long periods through the market cycle. Obviously, the market will go up and down, but through the market cycle with low volatility and high defensiveness. And that's the model that we like to promote. And I think we've been pretty consistent with it. So at our last call, we did say that our current 3-year period ends in June, and we expect to come in at the high end of that range. And when we do that, that will be depending on how you measure either the fourth or the third consecutive 3-year period that we've done that. And so as you think about us as an investment, you should really think about that long-term compounding. And then the last piece I'll mention is just we are -- we've been in a bit of an investment cycle in the past couple of years. I'm sure we'll talk about that. We're just completing that, and we expect to see -- we've always been a high free cash flow conversion company with a high ROIC. And I think as we complete this investment cycle, which we're just in the midst of doing, you're going to see us begin to return to those historic numbers and higher ROIC over time.

Sure. Very helpful introduction. Thank you. So building off of that, and certainly, you guys are a very unique company. But what would you say is your competitive advantage? What makes you better than anybody else who's trying to compete against you?

Yes, I think there are two things. First of all, our biggest competitor one is internal. So if you look at that $60 billion. The biggest part of it is on vended. And so that's our biggest competitor. And our competitive advantage relative to that is our ability to neutralize nondifferentiating activity and to take something that one of -- that our clients have to do, but they can't really -- it doesn't make sense for them to invest enough to really do it well. And we can take that one thing. We can invest more than it makes sense for any of our clients to invest to do it better with a higher level of functionality at lower cost to them and still have money left over for our shareholders to provide a nice return. So that's our core competitive advantage. And then I couple that with a real culture of client service and innovation based on what we call the service profit chain. But as you heard of, we do great buyer associates, did to date by clients and shareholders benefit from that. And because of the really good service that we provide, it gives our clients the confidence to give us the next thing. And we have a relationship with literally almost every broker dealer today. So when we have new sales, it's really about selling the next to the same client, and we have a good track record with that over time.

That's probably a good segue to -- so you have your core competencies, you have your competitive advantages. I think we probably have a sense of how that applies to your existing businesses, but maybe how does that apply to wealth management and your decision to really kind of go deep in the wealth management technology space?

Yes. So yes, first, we've always been in the wealth management space. We serve nearly every wealth management firm to our governance business. We have the leading back office application in wealth management. And about 30% of U.S. advisers use some solution from us. So we do have a position. As we looked at this a few years ago, what we really thought was this is a big total addressable market that is undergoing significant technology chain that is underserved and where we already have good relationships. And so that was really the rationale. I can talk about you see that there's a $16 billion -- $15 billion market. There's no real scale technology player serving that market today. You need to have to build it yourself or collect a bunch of assets and try to stitch them together, which is expensive. And so that really -- and then as we had a partner in UBS, who was the #4 player but saying, "I'm #4, but only half the size of #3, I don't think we as #4 is ever going to get the scale that I need. Let's work together to create something that could serve the rest of the industry." I think that was a very compelling proposition. Now it's evolved since then. And -- but I'm sure we're going to talk about that next.

Well, next, maybe just describe the wealth tech solution for the folks in the room here. There's a comprehensive solution, but underlying that is a number of components. So could you maybe kind of walk through what that looks like?

Yes. It's always been designed as I said a set of components because there are a lot of different business models in wealth management, so there's no one platform that can satisfy all wealth managers, as you all know from Raymond James. This is a different model than LTL. It's a different model than Morgan Stanley. And so this is always designed as a really robust core facing off to the depositories, back office, which is best-in-class, multi-currency, multi-immunity, et cetera. Then over the top of that, a really modern-day integration layer connected with APIs to a suite of components that might be some built by us, some built by our clients, some built by third parties, and -- but that all work together through this integration. And those components really fall into 2 buckets. So there's a bucket around making advisers more productive. That includes as a next generation of workstation. There is a -- it's a really good billing application that has great economics for home office. There's a whole suite of things that next investment recommendations, those kinds of things. Then there's a suite of components around enhancing the experience for the end investor. That can be everything from digital communications to really clear billing average billing, which also has great economics for the firm. And then there's applications around sort of digitizing operations, making health in more efficient, connecting essentially branches and advisers straight through to back office, and that collection of components of which there are something like 30 altogether make up the suite. I think what we're seeing now is we have talked to clients, and it's great to be out there showing them live software. And as we do that, I think what we've seen is a lot of appetite, not for transformative kinds of things, but a lot of appetite. Well, this is my problem right now. Let's put that in. I can get a good ROI on that they have me pay for the next thing, and I can transform over time.

Got it. So the build-out, it's no secret, it's a little bit delayed. It's a little bit over budget relative to what the initial expectations were, but the mindset at this point is probably that's a sum cost. So moving forward, how do you maximize the value of that franchise? And how comfortable are you of UBS as being a good partner for you to work with going forward?

Yes. So let's, first of all, start with the fact that the large trading investment is done, the platform, the development is complete, the testing is largely complete. So the investment we're really in a wind down of the investment pace just to sort of underline that piece. And then you can take when you think about the longer-term impacts, we can really divide it into sort of immediate near term and then longer term. So in terms of the immediate near term, we are -- we will be beginning to recognize revenue in the first part of our next fiscal year, so beginning in July. We had put out a number of what we thought that would be in the fall. And because of where T+1 calls and sort of rejigging the order things with UBS, we track that. But what I can say is we will be recognizing revenue will be cash flow positive next year. Depending across the difference in scenarios, it's really related to what they roll out in what order. We think the economics to us across those scenarios are pretty much the same. And that is -- and they are pretty much the same as they were last fall, even with $100 million number, and we expect to incorporate that within our normal margin structure. So that's the near-term impact. The longer-term impact is really around how do we grow our wealth management business. And as we've got a $500 million business, I think we should expect to see that being a nice organic growth business above Broadridge's organic growth rate. I can't say exactly what that is, but we expect that to be -- and it's not going to be waiting under transformative deals but a sequence of a smaller thing that just result in a nice organic growth on top of that $500 million.

And a nice organic growth rate at attractive incremental margins under the build once, sell multiple times philosophy.

Yes. I mean really, with this, it is what we built with UBS is fully reusable for others. And so we should see good margin on those.

Got it. So you touched on the business earlier, Itiviti, now rebranded Broadridge Trading and Connectivity Solutions. That's probably been the best growth story within your GTO segment over the last year or so. What's driving the growth there? And how sustainable do you think that will prove to be?

Yes. Thank you for asking about it. We're really excited about Itiviti, now BTCS, as you say. Thanks for pointing that out. As we think about our capital markets franchise, strong franchise, we've wanted to be in the front office. With Itiviti, we have that opportunity, and that really -- we've been looking at it for a while, and we didn't expect it was going to happen but it fell into a range because some other things that are going on in the market that were net our hurdle rates, and we're able to transact with a lot of discipline. When we look at -- and that, we underwrote that with sort of high single-digit growth rates for that over the long term. And when we look at the market and the front office's order management, so this is what traders use to input orders and execution management, which is how they route those 2 markets to get best execution. So order and execution management, that's about a $6 billion market. It's about half vended. Fidessa, now part of Ion is the market leader with 40-plus percent share. FIS is #2 with high-teens share. Itiviti is #3 with about 15% share. So we have 3 goals in buying this. First of all, was to do what Itiviti, which is already doing, which is continue to take share from FIS and Fidessa Ion. And those are companies neither of which are really investing in their platform. Fidessa had been acquired by Ion, and there were a lot of clients that were looking to -- for an alternative to that. And so job 1 is just continue the momentum that the firm already had. Job 2 is to bring Itiviti more to North America and more to Broadridge clients. So it's been a largely outside the U.S. company, some less, but really ramp up what we're doing in the U.S. as well as being Broadridge to some of its clients to get the cross-selling going. That's a little more medium term. And then longer term is create a real front-to-back proposition that would improve both the front and the back by doing that. And that really has been really validated. All three of those have been validated by our experience so far. We've had good strong sales. We just had a really nice sale to different Broadridge clients. So they've been trying to get for a long time, and I think really validates the cross-sell piece of things. And the conversations on front to back are also really positive. So there's been nothing -- everything has happened so far in the market and our conversations with clients have really validated that.

So pivoting to your ICS segment, I think there's a narrative that because the last couple of years were so strong in terms of proxy position count growth that as retail participation in equity markets maybe slows because of the bear market for whatever reason that we're going to see your fund position -- or your equity position outgrowth really decelerate from even where it was last couple of quarters. What are your views on that business? And I know I got my own views, but why do you think maybe people underestimate the quality of that franchise for you?

Yes. Look, it's a very deeply embedded franchise, right? So from a quality standpoint, I think it has a lot of attractive features. I think specifically in terms of the position growth, so the core driver of our revenue in that business to get paid per position. So if you have 1 share of Amazon or 10 shares, it's a position. Or once you refund or not, it's a position. And those have grown historically in mid- to high single digits based on account growth and then based on positions per account. The last couple of years have grown much way more than that. And a lot of people attributed that to COVID, which definitely was a big factor, but there's another secular change that took place at the same time, which is the advent of free trading, traded by Robinhood, but soon followed by Schwab and Fidelity and others. And that's been a big secular here. So we have good visibility out 6 months and have a lot of confidence in that and in this year. I'm not sure I have a full crystal ball after that. But I do think that what we're modeling is that this is a sort of a new base from which we then all the other growth factors that we historically see will continue to propel us. Those other growth factors are continued account growth, but really, it's around the growth of managed accounts. So if you look even this past quarter, the overall growth rate was 9% in positions. For managed accounts, it was 14%. And that is people converting 2 managed accounts. It's a big trend in wealth management, as you know. And that's when it has a lot of legs. And then behind that, there are the next generation of innovations like pass-through voting and like indexing, direct indexing that we think and that thing those are going to be additive and transform the growth rate higher, but we think that will sustain those mid- to high single-digit growth rate.

And then staying in the ICS segment. In 2016, Broadridge acquired a customer communications business, it's been something of a drag on segment revenue growth up until 2022. What's changed in that business? And is there a lesson to be learned about too early purpose opportunity? Just need to be patient.

Yes, I think, first of all , the OCC was a drag on our top line. We did at the time that we acquired it, there were some clients that were in the process of deconverting. We had already made that decision before we bought it. We fully underwrote that inside the deal. So that did depress the top line. It has never been a drag on the bottom line, and it has grown earnings 14% compounded since we bought it. So it's been a real success from that standpoint. We had 3 objectives when we bought that. They notice the model of 3 objectives when we're acquisition in here some place, but we had 3 objectives when we bought that. The first was to achieve cost synergies, approved the existing, approved the existing operation that we had in that business. We targeted $20 million. We've achieved well over $50 million, which has certainly contributed to that 14% compounded growth. The second objective was to really be the print consolidation hub as in-house print is only half vended also. So as in-house facilities became less economic, I think we had sales of over $40 million a year since we bought it. So that's been a -- checked that box. And the last was to, really, then convert that print to digital. And with some of the new products we're seeing and new clients are run with different Wealth InFocus platform, which we may not have time to get into right now, but it's really good, so we really do going to see that digital piece kicked off. So I think my lesson from it is that taking a long-term view is really the right way to create a lot of value for shareholders.

Got it. So you mentioned earlier that you guys give a 3-year view every 3 years. And just to summarize, 5% to 7% organic recurring revenue growth, a couple of points of growth from acquisitions, around 50 basis points of margin expansion per year. I don't think that you're in a position to totally front run your next December event at this point. But do you see anything change in the model either positive or negative that would maybe people should think you're going to deviate from that typical Broadridge type outlook?

So first of all, thank you for repeating the TSR formula because I think that is really, we've always come back to that and emphasizing how important that is, I think, for our long-term investors. And we are right now in the midst of a -- over the course of this year, a pretty pre-comprehensives that are looking to the whole next 10 years and AI and DLT, how will the market evolve. I think what I can tell you is that we see a lot of opportunity. We can't really front run next December. I don't see anything -- I certainly don't see any main crisis, and I see a lot of opportunity.

Maybe I'll pause to see if we have any questions in the room. Okay. I'll keep going on by myself. Are there any areas across your business where you can lean in the pricing a little bit more during an inflationary environment?

Yes. So let's start just with inflation. So folks have a good picture. So first of all, not inflation, but interest rates, which are related to inflation. We're -- just for those that aren't following us closely, we're very neutral on interest rates because we have some significant cash balances to get in a couple of our businesses. So neutral on interest rates. When you think about the impact of inflation on Broadridge then we have a big chunk of pass-through revenues that are direct pass-throughs. And then if you take our non-regulatory business, which is the majority of our revenues, the vast majority of those are based on contracts that have CPI built into them. So that leaves the regulatory business where the pricing is regulated, but we have a lot of operating leverage in that business. So we feel not 100% inflation, inflation, but pretty good inflation, some inflation. When we then think about where do we have pricing power, it is -- as I said, we have CPI and a lot of the business. It is -- our whole strategy is around landing, expanding, taking more share with existing clients. And so we've always had a very client-friendly view within the margin constraints that we have, and that has consistently allowed us to take share and grow revenue. And that's really, our business philosophy is to keep growing the top line and growing the bottom line of this income.

Got it. And then speaking of margins, so for an investor who's looking at Broadridge for the first time, they're looking at a company that's differentiated. It's scalable. It seems like top line is growing well. And adjusted operating margins are still slightly below 20%. So how do you kind of square some really positive characteristics relative to a March profile that might be a little bit lower than what somebody might otherwise expect?

Yes. Really, really good question for those that aren't as familiar with our company. I encourage you to keep a side model that strips out the pass-through. So we're obligated to report the pass-throughs as part of our revenue. For us not to do that, we have to have our clients directly contract for all those things, which they wouldn't have the buying power and be very -- not really good for them. So we take the pass-throughs into our revenue. If you strip out the pass-throughs, then you have a company that's growing total revenue at 79% in a normal year with margins that are more like 30% and -- which is still lower than some pure tech companies, but we do have a services component, and we do have that land and expand and grow revenue philosophy.

Perfect. Well, on that note, I think we're out of time. But thank you, everybody, for joining us.